Can Capitalism Survive?

Like the American nation, the economic system known as capitalism is nearing a bicentennial: the 200th anniversary of the publication, in 1776, of the Scottish philosopher Adam Smith’s classic work, The Wealth of Nations. In its 1,097 pages, the world found the first full description of a free economy—one in which, Smith prophesied, the drives of millions of people for personal profit, colliding against each other in an unfettered market, would produce “universal opulence which extends itself to the lowest ranks of the people.” His book rapidly became a capitalist declaration of independence from the remaining shackles of feudalism and helped launch an economic revolution that has produced far more wealth than man had amassed in all previous history. Yet today the heirs of that revolution cannot celebrate in triumph. As capitalism approaches its bicentennial, it is beset by crisis. Increasingly, its supporters as well as its critics ask: Can capitalism survive?

The question is all the more urgent because the U.S., by far the most powerful capitalist economy, is recovering from its recent debilitating bout of inflationary recession and faces a particularly uncertain economic future. Production is beginning to rebound. Officially, the unemployment rate fell from 9.2% in May to 8.6% in June. But that was a statistical fluke, reflecting the imprecision of the Government’s methods in measuring the number of students entering the job market for the summer. Thus the jobless rate could well go up again in the months ahead. Most experts expect the rate to stay above 8% for at least another year and not dip below 7% until 1977.

Bringing it down faster might well require surges in demand that would kick up a new, probably more devastating inflation. There is a gnawing fear that capitalism has no way to cure inflation except deep recession, and that any concerted attempt to lift an economy rapidly out of recession will only fan inflation.

The situation is more threatening in other major capitalist nations. Britain, with its inflation roaring at 28% and its pound scraping an alltime low of $2.19, totters on the edge of economic collapse. To fight severe inflation, the governments of Italy and Japan are putting their peoples through the worst recessions in a quarter-century. Inflation in Canada is currently running at 10.1% and in Australia at 17.5%. Even West Germany, which has the most successful postwar economy, is wrestling now with inflation and unemployment.

Inflationary recession is only the most imminent danger; there are longerrange, subtler perils too. Within many a capitalist country, the free market is being steadily hemmed in by the power of omnipresent government regulators, mass unions and giant corporations. Meanwhile, many intellectuals—and young people—contend that capitalism at best can build only a rich, not a just society. In January seven Nobel prizewinners, including Economists Gunnar Myrdal and Kenneth J. Arrow, signed a declaration condemning Western capitalism for bringing on a crisis by producing “primarily for corporate profit.” They called for an intensive search for “alternatives to the prevailing Western economic systems.”

Externally, the advanced capitalist societies confront a preindustrial world full of suspicion of “economic imperialism” and eager to use its control of some basic raw materials to capture a greater share of global wealth. One illustration of the size of the threat is the disruption of Western economies caused by the huge price increases of the Organization of Petroleum Exporting Countries, most of whose members have centrally run economies. The oil-price crisis has slowed the economic growth that is one of capitalism’s main justifications for existence.

British Historian Arnold Toynbee has glumly predicted that the commodity-producing nations will launch a kind of economic siege warfare against the Western capitalistic world, which will react by putting its own economies “in irons”—that is, dictatorially regulating all production, consumption and investment. U.S. Economist Milton Friedman, a disciple of Adam Smith, darkly suspects that capitalist freedom will turn out to be “an accident” in the long sweep of history, and that humanity will sink back into its “natural state” of “tyranny and misery.”

It is a little early to write off capitalism. The system has survived wars, depressions, the loss of colonial empires—even the accession to government power, in such countries as Britain, France and Germany, of parties that called themselves socialist but proved unable or unwilling to dismantle the system.

Today, ironically, the strength and adaptability of capitalism are appreciated most by fervent socialists who would like to destroy the system but realize they are nowhere near their goal. New Left Philosopher Herbert Marcuse denounces capitalism’s profit motive as “obscene” but concedes that it is so powerful that the downfall of capitalism “is not imminent.” Michael Harrington, the pre-eminent American socialist, concedes that capitalism “has shown remarkable resiliency” and predicts that it “will spend and plan its way out of the present situation.”

It Started with Self-Interest

Capitalism’s whole spirit is growth through adaptation to ceaseless change—in prices, profits, technology, consumer tastes. In fact, its intellectual history begins with Adam Smith’s effort to explain why and how the natural instincts and capabilities of free men cause economies to change and progress. All this is worthy of being recalled today because it remains little understood.

Smith was not the first to catch glimmerings of the potential power of a free economy. Some scholars argue that he did no more than pin down and define the rationalist, antiauthoritarian ideas that were in the air 200 years ago. But Smith did that with such mastery that he produced the world’s first complete and coherent theory of economic behavior, establishing the starting point for all subsequent capitalist thought.

In Smith’s view, the great motivator of economic activity is “the uniform, constant, and uninterrupted effort of every man to better his condition”—or, bluntly, self-interest. Only this drive moves men to produce the goods that society needs. As he put it: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” (Smith, observed English Economist Walter Bagehot in 1888, “thought that there was a Scotchman inside every man.”)

Self-interest expresses itself as the drive for profit and produces that great marvel, the self-regulating market. If consumers are free to spend their money any way they wish, and businessmen can compete uninhibitedly for their favor, then capital and labor will flow “naturally” (a favorite Smithian word) into the uses where they are most needed. If consumers want, say, more bread than is being produced, they will pay high prices and bakers will earn high profits. Those profits will lure investors to build more bakeries. If they wind up turning out more bread than consumers want to buy, prices and profits will fall and capital will shift into making something that consumers need and desire more—shoes, perhaps. Thus the businessman seeking only his own profit is “led by an invisible hand to promote an end which was no part of his intention”—the common good.

Moreover, the process is not merely circular but also dynamic. Competition keeps wiping out the inefficient businessmen, rewarding those who can turn out the most goods at the lowest prices and forcing even them to keep reinvesting their profits in new products or better operating methods if they want to stay ahead of their rivals. As a result, production keeps rising, pulling up wages (“The liberal reward of labor . . . is the natural symptom of increasing national wealth”) and distributing to everyone more of “the necessaries, conveniences and amusements of human life.”

Smith’s system was designed to enthrone not the businessman but the consumer. Far from admiring merchants, he looked upon them as a greedy lot who were forever trying to bypass the market by conspiring to fix prices and hold down wages. But he thought, somewhat naively, that such monopolistic schemes could prosper only with the active aid of government—which, in his day, they often got. So he advocated complete laissez-faire. Government, he said, should stop trying to regulate trade, cease all intervention in the market and let free competition work its wonders.

These ideas were well to the left of the 18th century’s mercantilist doctrine, which held that trade should be strictly regulated in order to pile up gold and silver in national treasuries. The ideas also ran counter to the strong feelings among upper-level society that “opulence” for the “lower ranks” would be very dangerous. Smith’s revolutionary concepts took some time to catch on. But The Wealth of Nations was read by all the leading intellects of the time and praised by many, including Smith’s friends David Hume and Edmund Burke. By the early 19th century, Smith’s doctrine had conquered the academic world and began inspiring governments to unchain their economies. In 1846, for example, British reformers quoting The Wealth of Nations repealed the Corn Laws, which had kept food prices high by restricting imports. U.S. state legislatures, influenced by the new vogue of free competition, passed laws permitting any investors who met minimum qualifications to set up a corporation; previously, each corporation had to be chartered separately, and the charters amounted to grants of monopoly power. Almost on cue, some wonders followed—both beneficent and malign.

Entrepreneurs accumulated and reinvested capital on a truly awesome scale. Production multiplied to a degree that is difficult to believe, considering how close the precapitalist world was to the Middle Ages in most material conditions of life. Some statistics: world production of pig iron soared from 10 million tons in 1867 to 357 million tons a century later. As late as 1850, human muscle and animal power accounted for 94% of the energy used in U.S. industry; today they supply less than 1%. Populations burgeoned as capitalism produced the food and goods to keep unprecedented numbers of people alive. North America’s population exploded from 5.7 million in 1800 to 81 million by 1900 and 339 million in 1973.

But capitalism also proved to be a disruptive force on an equally gigantic scale. It subjected humanity to the psychological shock of living with continuous and accelerating technological and social change. The Industrial Revolution covered Europe and America with what Smith’s contemporary, Poet William Blake, called “dark Satanic mills,” wiping out cottage industry and jamming workers into ugly new factory towns. Though the purchasing power of factory workers began to rise slowly, a father’s earnings were often insufficient to support a family. Children as young as eight worked as much as 14 hours a day in the mills and mines.

Exploitation of labor continued for generations. As late as the 1890s, Henry C. Frick, after breaking a strike at the Carnegie Steel Works in Homestead, Pa., reduced wages and re-established an 84-hour work week. At the other end of the scale, Andrew Carnegie, John D. Rockefeller and other capitalists accumulated immense fortunes, in part because they proved Adam Smith wrong in thinking that an unregulated market could not be monopolized. In 1912, Woodrow Wilson, no radical, lamented that “we are all caught in a great economic system which is heartless.”

Some of the thinkers who followed Adam Smith had made capitalism seem heartless indeed. The Rev. Thomas Malthus grimly announced that no person has any claim on society for a “right to subsistence when his labor will not fairly purchase it.” David Ricardo worked out what became known as the “iron law of wages.” His thesis: workers in the long run would get only the bare minimum necessary to keep themselves and their families alive. If they temporarily should earn more, they would breed so many children that competition for jobs eventually would drive wages down again. Ricardo did not think that this state of affairs was desirable—only inevitable. Nonetheless, he and Malthus earned for capitalist economics a name that it has never shaken; Thomas Carlyle had them in mind when he referred to “Respectable Professors of the Dismal Science.”

The science seemed especially dismal to Karl Marx, who damned capitalism as an inhuman system in which “all that is holy is profaned.” He charged that it tended to “mutilate the laborer into a fragment of a man, degrade him to the level of appendage of a machine.” In The Communist Manifesto (1848), Marx and Frederick Engels conceded that capitalism “has created more massive and more colossal productive forces than have all preceding generations together.” Nonetheless, Marx prophesied that capitalism would destroy itself: “Capitalist production begets, with the inexorability of a law of Nature, its own negation.”

Capitalism, Marx reckoned, would pour out more goods than workers could buy with the paltry wages that the system paid them. Wages might rise during a period of expansion, but that rise would cut into profits, leaving capitalists with too little investment money to keep the boom going, and the machine would falter into a slump. Big capitalists would seize the opportunity to slash wages, buy up the plants and machinery of their ruined brethren and get the boom going again, but the cycle would repeat itself, leading to a worse crash. Eventually, ownership of the means of production would be concentrated among so few capitalists that they would be ripe for overthrow by a proletariat driven by increasing misery into revolution.

Though the apocalyptic prophecy was spectacularly wrong, Marx did point out two highly vulnerable areas in the system. His theory of capitalist concentration anticipated the rising power of large corporations, which can stifle competition and raise prices even in periods of weak demand. More important, Marx heralded the terrifying and prolonged depressions of the 1870s and the 1930s, which classical economics said the self-regulating market would never permit. The nightmare of the 1930s for a while threatened to give Marx the final word.

Fortunately, the Great Depression also inspired the most significant theories of John Maynard Keynes, the British economist who has often been called the savior of capitalism. Keynes insisted that a government could get the free economy moving up again by pumping in purchasing power—through tax cuts, heavy spending and the outright creation of money. Then production would increase, generating more savings, which would be invested. His prescription worked—though it took Government spending on the previously unimaginable scale of World War II to end the Depression. (Keynes also said that tax increases and spending cuts could help contain inflation, but popularly elected governments have seldom been brave enough to follow this part of the Keynesian prescription.)

Since World War II, all capitalist governments have become enthusiastically Keynesian. None would dream of leaving a depression, or even a severe recession, to right itself. By winning acceptance for the idea that government is responsible for the health of the economy, Keynes promoted a degree of state intervention into the market that has helped transform capitalism in a way that Smith never anticipated.

Keynesian philosophy accelerated the trend toward progressive legislation, which had been building in the U.S. since the days of the early trustbusters and Teddy Roosevelt, and inspired a bewildering complex of interventionist policies. U.S. companies and entrepreneurs, for example, are restricted by banking and stock market regulations, antitrust prohibitions, consumer protection and antipollution laws, “affirmativeaction” programs that aim at forcing the hiring of more blacks and women, to name only a few measures. The poor who cannot sustain themselves in the market get Medicaid, welfare payments, food stamps.

Not all of this Government intervention has been beneficial, of course, and some of it has been downright harmful. The operations of federal transportation-regulation agencies, in particular, have often propped up prices and restricted competition. But this complex of laws has on the whole made capitalism both more humane and more effective. As Economist John Kenneth Galbraith once commented dryly: “An angry god may have endowed capitalism with inherent contradictions. But at least as an afterthought he was kind enough to make social reform surprisingly consistent with improved operation of the system.”

Ten years ago—at least in the U.S., Canada, Western Europe and Japan —this modern capitalism seemed to be on the verge of producing the permanently affluent society. Keynesian policies had kept recessions brief, mild and infrequent; the end of World War II opened the longest period of sustained growth ever. American Economist George Stigler announced that “economics is finally at the threshold of its Golden Age—nay, we already have one foot through the door.”

Today few would express such euphoria, but many economists, politicians and philosophers propose various solutions to the troubles in the system.

Inflation and Recession

Through the 1960s, these were considered antithetical problems: inflation was a phenomenon that accompanied booms, and recession was so much its opposite that it was often called “deflation.” Today, inflation and recession have become overlapping phases of a cycle—to which economists have given such cacophonous names as “stagflation,” “slumpflation,” “infession” and “inflump.” Breaking that inflation-recession cycle is rapidly becoming the major problem, not only of capitalism, but of democracy. Inflationary recession is more likely than anything else to make voters turn to an authoritarian fascist or socialist system that would fix price, production and employment levels by fiat, and permit no argument.

Unhappily, the systems of Adam Smith, and even of Keynes, give little guidance as to how to cope with the malaise. Much of the explosive 1973-74 inflation, of course, resulted from what economists call “random shocks” to the system: oil price gouging by the OPEC cartel and food shortages caused largely by unusual weather. But the underlying inflationary momentum seems to be supplied by modern capitalist democracy.

The root problem is that everybody wants more. Even in prosperous times, the demands of labor for ever higher wages, of generals and admirals for increasingly sophisticated weapons, and the less affluent for expanded government social services always add up to more than the economy can produce at stable prices. Rather than say no to the demands of any vocal constituency, democratic governments too often find it easier to run huge budget deficits, thus fueling inflation.

Sooner or later, however, governments must act to curb inflation—and risk recession—by curtailing spending and restricting the growth of money supply. Many economists indeed blame all post-World War II recessions on overly zealous anti-inflationary policy. But that criticism obscures a vital point. In a society that operates by private decision-making rather than central command, governments must make difficult judgments on the exact mix of tax, spending and money-supply policies needed to nudge businessmen and consumers into the “right” decisions on how much to buy, build and borrow. Inevitably, the fallible humans who run treasury ministries and central banks will make some wrong judgments—and the economy will react.

Another reason why recession is always a threat in a capitalist economy is that business managers, too, are free to misjudge the market, make unwise investments and speculate foolishly. As socialists correctly note, recession is capitalism’s way of flushing unwanted products and mismanaged companies out of the system. If automakers, for example, bring out cars that motorists dislike at prices they cannot afford, auto production, sales and employment inevitably will fall.

There is some evidence that recession is still capable of slowing inflation by making it hard for businessmen to sell goods at high prices. In the U.S., while unemployment rose to 34-year highs, the rate of consumer price inflation dropped from 12.2% last December to 5% from March through May. It now seems to take a much deeper recession than in past decades to break a price spiral. There are three reasons for this:

1) Powerful unions keep pushing up wages, and therefore prices, even when unemployment is high.

2) Humanitarian programs, such as unemployment compensation, Social Security and food stamps, prop up purchasing power. This maintains the ability of consumers to buy—and the ability of businessmen to resist price cutting—even while joblessness is rising.

3) Service trades account for an increasing share of sales and jobs—54% of all employment in the U.S.—and it is tough for service businesses to offset wage increases by improving productivity. So they keep on raising prices.

Worst of all, inflation increasingly seems capable of directly causing recession. Inflation does so by either pricing many goods out of the reach of would-be buyers, or by making consumers figure that they dare not buy cars or refrigerators because they will need every penny to pay the next round of increases in food, clothing, rent and utility bills.

How can these problems be alleviated? In dealing with inflation-recession, national policy cannot “fine tune” the economy, but must continue to seek limited yet important aims: adjusting tax, spending and money-supply policies to stimulate or restrain the economy. The recent record is scarcely reassuring. But there is ground for hope that economic managers can learn enough from past mistakes to wield their fiscal and monetary weapons more effectively.

Economists generally agree that governments should shun utopianism and aim at reducing inflation and unemployment to bearable rates—to perhaps 5% for both in America. The U.S. should not repeat a mistake of some past years, when the Government continued to stimulate the economy even after the jobless rate had fallen to 4%, in the hope of getting it still lower; that policy fueled inflation. Completely “full” employment is impossible because some people lack skills that can be marketed, and still others take time off while shifting between jobs.

Another prime requisite is that governments should be prepared to change fiscal-monetary policy in the early stages of slump or boom. A mildly restrictive policy in the late 1960s would have done more to restrain price increases than the recurring rounds of supertight money that followed after inflation had gathered powerful momentum. Similarly, a small tax cut and moderate expansion of the money supply last summer would have combatted unemployment more effectively than the heavy stimulus that was applied this spring.

This necessity to change course early poses a stern test for democratic leadership. At some point in the current recovery, it may be necessary for the Government to switch to a restrictive policy even when unemployment remains uncomfortably high, inflation is decelerating and the need for any restraint at all is not readily apparent to the voters.

If democratic leaders choose the correct policies and explain them forthrightly—a distressingly big if—the prospects are not all bleak. Enough remains of Adam Smith’s self-adjusting market to give the policymakers some assistance. If, as seems likely, the recent recession has broken the force of inflation, the slowing of price rises will probably encourage consumers later this year to begin buying many more cars, appliances and other goods. Then businessmen who have been zealously cutting inventories might find themselves with too little stock to maintain sales and would be forced to step up production.

For the longer term, however, fiscal and monetary policies must be supplemented by other measures to contain inflation and ease recession. The two most hotly disputed issues are whether the U.S. should adopt some form of wage and price restraints and whether it should move to some form of economic planning. Economists and other experts are sharply divided on these huge questions, but there is widespread agreement that Washington should adopt at least two other strategies:

1) Repeal a complex of laws, regulations and practices that prop up prices for the benefit of special interests. Economists at President Ford’s September summit meetings spotlighted 32 such rigidities. Among them: the Davis-Bacon Act, which compels contractors to pay inflationary wages on federally assisted construction projects; the Jones Act, which forbids shippers to use low-cost foreign vessels to move goods from one U.S. port to another; misnamed fair-trade laws that permit manufacturers to prevent retailers from cutting prices on brand-name products; agricultural “marketing orders” that restrict the supply of oranges, tomatoes and other products; and freight, regulations that force many trucks to return empty from long-distance trips, although they could carry cargo on the backhauls.

2) Enhance the skills and mobility of labor. This combats both inflation and unemployment. The U.S. should revive and expand the manpower-training programs started under the Johnson Administration but curtailed by President Nixon. Though the programs were sloppily run, some of them—notably those under which private businessmen, with federal financing, hired and trained the so-called hard-core unemployed—showed great promise of teaching skills to otherwise “unemployable” people. The Labor Department also should set up the long-discussed computerized “job bank” that would list employment opportunities throughout the nation, and subsidize needy workers who want to move to take distant jobs. In Sweden, the government offers more than 300 courses to retrain the jobless, pays the expenses of an unemployed Swede who travels to look for work, and underwrites his moving bills once he finds a job. The cost is high: more than 5% of the Swedish budget. But the payoff is impressive: Swedish unemployment has consistently been well below that of the U.S.

If another Smith—or Keynes—came along today, the tremendous intellectual challenge facing him would be to devise wage and price restraints that would be effective but not coercive. Rigid, comprehensive controls have almost never been effective for very long. They breed shortages by discouraging businessmen from making investments to expand the output of products that they are not sure can be sold at profitable prices. Controls also freeze into the wage structure inequities that workers find intolerable.

A number of economists argue that there is a way short of comprehensive controls that would oblige corporate chiefs and union leaders to consider the public interest when formulating their private policies. According to this argument, the Government should adopt some form of flexible wage-price surveillance to prevent unions and corporations from using their muscle to force outsize increases. A Government body would monitor wages and prices and demand justification for suspiciously large raises. The trouble is that to be effective this body would have to be authorized to roll back increases that it considered unjustified—and this action would amount to controls and coercion. In sum, a huge question remains unanswered: How can a capitalist economy achieve long-term price stability without risking deep recessions or, much worse, sacrificing some freedoms?

An equally difficult and closely related issue is whether—and how—capitalist economies can improve the functioning of the free market without attacking the vitals of that market. To guide investment and production, capitalism still relies primarily on the response of private businessmen to the signals that the market gives off about the strength of consumer demand and the potential for profit. But the market’s ability to anticipate long-range trends is at best imperfect, and it has failed to provide for some critical needs of a complex modern society.

The worst imbalance is between private and public investment. Capitalism has an ancient antipathy to public spending that began with Adam Smith, who classed the King and “all the officers both of justice and war who serve under him” as “unproductive” workers on the ground that they created no new wealth. Government-financed public works rarely if ever turn a profit and they have all too often been neglected while resources have been poured into projects that stood to make more money. Example: the U.S. has built a magnificent highway network to serve the auto, but public transportation generally ranges from poor to nonexistent.

In two overlapping areas, pollution control and energy development, misguidance by the market has hurt capitalist societies. Pollution, of course, is a problem for all industrial countries; Arthur Okun, a member of TIME’S Board of Economists, observes pithily that “socialist smoke pollutes as much as capitalist smoke.” But free enterprisers proved as incapable as any production-at-all-costs commissar of foreseeing the pollution danger.

Worse, businessmen found profit in highly polluting technologies like the substitution of synthetic detergents for natural soaps. The cleanup did not begin until the befouling of the environment had become a demonstrable threat to human life. Now the cleansing process is holding back economic growth.

The market also failed to foresee the swift onrush and the grave consequences of the energy crisis. For many years, an abundance of oil kept the price low, and cheap energy helped to create fabulous economic growth. But the U.S. in particular squandered enormous quantities of energy on oversize cars, sealed buildings and flimsily insulated homes. Some oilmen warned that a supply squeeze was coming and that massive efforts should be made to conserve oil and invest in new sources. The warnings were not taken seriously. When the energy crisis struck, the free market was thrown into near panic. Of course, nobody could have predicted that the crisis would hit so soon, simply because it was hard indeed to foresee the explosive political events that triggered it: the 1973 Middle East war and the subsequent rallying of the Arabs behind the oil boycott. But the fact remains that the market’s price signals gave capitalist industry the wrong guidance on energy use, conservation and development. One reason is that while the market is an excellent short-term indicator of supply and demand, it does not purport to do well at forecasting the longer term.

The Debate Over Planning

In order to cope with the inadequacies of the market, a rising number of experts urge capitalist governments to adopt some form of economic planning. But a grave problem is that command planning, in which government bureaucrats decide how much and just what goods are to be produced, is the antithesis of capitalism. Western European nations are even disillusioned with their persuasion-and-incentive plans of the 1960s, which also generally failed to anticipate the economic crises of the 1970s. Yet more and more people in the U.S. seem attracted to the idea of setting up a federal body that would attempt to give early warnings of shortages and bottlenecks that both restrict production and aggravate inflation.

A group of mostly liberal thinkers, including Economist Wassily Leontief, Investment Banker Robert V. Roosa and United Auto Workers’ President Leonard Woodcock, have called for the establishment of a U.S. office of national economic planning. They have in mind not a stiff bureaucracy that would sap freedoms by handing down directives, but a forward-looking group of several hundred scientists and technicians (and a few economists) who would study the future of the U.S. economy much as a savvy company studies its market. Relying on such factors as population trends and the likely availability of resources, they would try to estimate the economy’s future needs for developing domestic supplies, expanding industries and raising capital. They would also attempt to project how many cars, houses and tons of wheat, steel, paper and other products the economy would demand. Then they would propose guidelines—tax and investment incentives as well as broader monetary and fiscal policies—for meeting those goals. Whenever the President or Congress floated major legislation, they would estimate its effects on prices and jobs.

Ford Motor Co. Chairman Henry Ford II has called for creation of a highly visible and vocal federal planning body—underscoring Nobel Laureate Leontief’s prediction that the U.S. will adopt planning “not because some wild radicals demand it but because businessmen will demand it to keep the system from sputtering to a halt.” Ford’s idea is that a planning organization should examine “cost-effectiveness and set timetables. It should take a look at population growth; usages of raw materials and their availability; what the price situation is going to be over a long period of time.” Says Ford: “We’re going to need all kinds of plans.”

Nobody is smart enough to predict correctly all, or even most of the time, but it could be that a group of expert forecasters would give the capitalist economy valuable early warnings and prevent some unpleasant surprises. The deeper question is whether policy should be guided by the predictions of a national planning body or by the forecasts of tens of thousands of entrepreneurs and corporate managers in a free market. The planners, their supporters say, would consult with businessmen. Moreover they would merely aim to identify the industries that should expand fast in order to avert shortages, and determine what incentives could help to produce the necessary investment. But that, too, raises a problem: If their plans were followed, tax credits and other incentives would be given to some industries—at the expense of others.

Yet there is no escaping the fact that leaders of capitalist economies must use every available resource to figure out the amounts of vital commodities that their industries will need to sustain strong growth. They will have to calculate where the supplies are likely to come from, what exploration, research and development investments will be required to produce them, what conservation steps and recycling programs may be necessary to stretch supplies, and what materials might be used as substitutes in a pinch. The tough question: Just who is to decide?

The answer is that private businessmen must decide but Government can do more to help them. It should do so not by setting up rigid five-year plans, but by employing the best of its fallible methods to give early warnings of what raw materials and investments will be most needed.

The Inequality of Wealth

Vast disparities in income and wealth are the deepest philosophical and moral problems of capitalism. Adam Smith candidly acknowledged that “wherever there is great property, there is great inequality.” And in his day, “for one very rich man, there must be at least 500 poor.” He proposed to ameliorate that situation by having the economy produce enough wealth to make the poor less poor. Capitalism aims for—and accomplishes—infinitely more than that today. Great numbers of once-poor people rise to the middle class, or higher.

From 1960 through 1973, economic growth dramatically reduced the number of Americans living below the Government’s officially defined poverty line, from 40 million out of 179 million to fewer than 23 million out of 211 million. But last year, according to Government estimates, 800,000 to 1.5 million slipped back into poverty because of the combination of recession and inflation. Though the slippage is doubtless temporary, it has led to great disillusionment among those left behind. Political Scientist Charles Lindblom of Yale asserts that capitalism in the past has depended on women, blacks and other groups to accept unthinkingly a disadvantaged role and a meager share of the system’s rewards. Now they are pressing for full equality and, says Lindblom, “it’s really touch and go” whether the system can satisfy them.

Expectations have been rising rapidly, largely because of two developments that Adam Smith did not foresee: universal suffrage and almost universal literacy in democratic societies. Almost everybody is better off than his father or grandfather, but that is not enough for literate people; they perceive that others are doing even better, and so they want more. And they often use their votes to support candidates who promise to get it for them. Thus one of the toughest long-range questions for democratic societies is just how much inequality will be—and can be—tolerated.

Philosophers of capitalism defend inequality on two grounds. Economist Friedrich A. Hayek, a Nobel Laureate, argues persuasively that the only alternative to the market’s unequal apportionment of rewards is distribution of income on the basis of each person’s moral worth—and who could possibly judge that fairly? Pragmatically, many theorists contend that inequality is necessary to reward with high income the initiative that produces economic growth. They add that growth makes the poor if not nearly equal to the rich, at least better off than they would be in a stagnant economy that distributed wealth equally. According to Economist Otto Eckstein’s summary: “Some injustice is inescapable if the system is to perform.”

Among many educated young people in capitalist countries, Maoist China is popular because its communes have created the world’s closest approach to true income equality, though at the price of numbing regimentation. The only way to reach total economic equality is at the expense of freedom (see TIME ESSAY), but the U.S. has more inequality than seems necessary for a dynamic economy. Any attempt even to reduce significantly the gap between income classes raises the unanswerable question of just how much inequality is necessary to provide incentive. A significant effort to redistribute income would provoke fierce resistance from politically powerful groups that rank statistically in the upper classes but do not consider themselves at all rich (in the U.S. a $30,000 pretax annual income puts a family into the top 5%, a $15,000 income in the top 21%).

Much of the demand for greater equality is really a protest against the injustices that a capitalist society could perfectly well remedy—while remaining capitalist. The greatest need is to improve the lot of the poor, and for that purpose nothing can replace a resumption of noninflationary growth. But special help, more than they get now, will be needed by the underclass of citizens who cannot find a secure place in the market economy: reservation Indians and welfare mothers, among others. For them, society should provide some form of guaranteed income, an idea endorsed in the past by such conservatives as Richard Nixon and Milton Friedman. Conservatives note that it is better to give special help to problem groups than to pump up the whole economy and propel inflation.

Relations with Poor Countries

Largely because the colonial powers were capitalist, many peoples of the Third World harbor bitter resentments against capitalism and have chosen socialism for their economies. In quite a few cases, this has retarded their development. For example, Daniel P. Moynihan, former U.S. Ambassador to India, points out that in 1947, the year of its independence, socialist-leaning India produced 1.2 million tons of steel, or slightly more than Japan. In 1973, capitalist Japan poured 119 million tons of steel—or more than 17 times India’s production. (And India has considerable iron ore; Japan imports it.)

With increasing emotion, developing nations complain that capitalist countries have subjected them to a neocolonialism that keeps them poor. The West, they charge, buys their raw materials cheaply, sells them manufactured goods at prices that are pushed steadily higher by inflation, and discriminates against their exports of manufactured goods.

The developing countries’ accusations are exaggerated. Prices of many raw materials have risen at least as much as—and in many cases more than—those of industrial exports. A more valid charge against the capitalist world than systematic exploitation is that it has failed to develop any consistent post-colonial economic strategy at all for dealing with the poor countries. The hostility of many less developed countries is potentially dangerous. Producers of ten commodities—copper, bauxite, iron ore, rubber, coffee, cocoa, tea, pepper, bananas and sugar—have talked of organizing cartels to jack up prices by withholding supplies.

Raw-materials planning can help the industrialized world defuse this danger. The industrial nations are already discussing plans to join in stockpiling enough oil to carry them through any renewed Arab embargo. Yale Economist Richard Cooper proposes broadening the idea to include the steady and coordinated accumulation by many nations of important materials—perhaps starting with natural rubber, copper and other metals.

For the industrial world, that policy would temper inflation by providing some insurance against shortages. When scarcities developed, commodities could be released from the stockpiles to hold down prices and ward off threats of boycott. (There would be little incentive for exporters to hold back supplies in an attempt to raise prices if they knew that their customers already had plenty.)

For developing countries, stockpiling promises to stabilize income from exports. In times of glut, industrial countries would take advantage of reduced prices to replenish their stocks. Poor nations might get less for each ton of copper or rubber, but might sell more and keep total export earnings steady.

The United Nations Conference on Trade and Development is holding a series of conferences this year in Geneva to discuss the stockpiling idea. UNCTAD officials happily anticipate an issue on which, for once, underdeveloped sellers and industrialized buyers might agree.

Dominance of the Corporation

Big corporations account for ever increasing shares of capitalist enterprise, and a good many economists applaud their productive effectiveness, though a variety of other thinkers have judged them to be essentially anticapitalist institutions. Adam Smith thought that the relatively few “joint stock companies” of his day lacked the vigorous entrepreneurial spirit. Marx believed that the corporation was a step away from capitalist individualism and toward the social management of production. The late Joseph Schumpeter, a giant among economists, feared that corporations would rob capitalism of vitality by splitting capitalists into owners who did not manage and managers who did not own; neither group, he thought, would care enough about the system to fight to save it from socialist takeover. That has not happened yet, but the possibility has worried many capitalist thinkers, among them Economist Milton Friedman and Sociologist Daniel Bell.

John Kenneth Galbraith implies that corporations have already killed Adam Smith’s self-regulating market. In his view, the larger a corporation grows the more it can escape from the workings of the market to become a law unto itself, thus paralyzing Adam Smith’s “invisible hand.” According to Galbraith, large companies can set prices more or less independently of demand, produce what they rather than consumers want, and in effect ram the products down consumers’ throats by the power of advertising. If corporations cannot defy the market, they can sometimes resist it for a long time when it refuses to conform to their plans. A classic example is Detroit’s stubborn insistence on building big, costly, gas-thirsty cars long after consumers had signaled a change in tastes by buying swarms of Volkswagens and Toyotas.

Yet this overall analysis is clearly hyperbolic. Corporate power is checked by what Galbraith himself in 1952 described as the “countervailing power” of unions, Government and rival big corporations. It is also checked by the trustbusters and, more important, the customers. Even in industries dominated by a few big companies (autos, oil, steel, computers, etc.), those firms compete fiercely for market shares. Advertising has failed to sell products as varied as the Edsel and maxiskirts. Strong consumer resistance can occasionally force price reductions, as the recent auto rebates proved anew. “When even the auto companies are cutting prices,” cracks Okun, “then you know that capitalism lives.”

Today’s capitalist economies undoubtedly benefit from powerful corporations. The sheer size of modern economies and the vast number of skills that must be marshaled to design and produce such products as color-TV sets and computers—to say nothing of space rockets—make any yearning for Adam Smith’s world of individual entrepreneurs an exercise in pointless nostalgia.

A special set of problems is, however, presented by the growth of multinational corporations, which now account for most of the global exchange of goods, services and investments. The multinational, as Moynihan says, “is arguably the most creative international institution of the 20th century.” Multinationals have brought to many countries jobs, modern goods, common-stock ownership and the most advanced technologies and management skills. But multinationals also have a unique freedom to escape from any country’s regulation.

They can—and do—disrupt currency markets by shifting huge sums from, say, dollars into Deutsche Marks. They can concentrate production in countries where tax and pollution laws are most lax, and foil national economic objectives by shifting their operations around from nation to nation. For example, multinationals poured considerable money into Germany, and hurt that country’s efforts to battle inflation by holding down the money supply. Many executives of multinational corporations would welcome an international code of conduct. Capitalist countries would help their economies operate more smoothly if they agreed to treaties harmonizing the tax, pollution and accounting standards that multinational corporations must meet.

In attacking its many difficulties, capitalism faces a final danger: most of the potential solutions involve an increased role for government regulation and control of income. There is a real question of how much further that can go without destroying the dynamism of the market system that makes capitalism so productive. But government can also put the market system to work solving problems.

Some public functions could be contracted out to private companies. For example, profit-making companies in the U.S. pick up garbage at a lower cost than city sanitation departments do, and United Parcel Service often delivers packages faster and cheaper than the U.S. Postal Service. Economist Walter Heller advocates a market approach to fighting pollution. His idea: levy stiff taxes on the discharge of effluents; the market would reward with high profits the companies that did the most to clean up the environment, and penalize polluters with skimpy earnings or actual losses.

The Virtues of Profits

One of the capitalist market system’s enduring strengths is precisely its reliance on the profit motive which, like it or not, is a powerful human drive. To many idealists the primacy of the profit motive has long seemed to be a sanctification of selfishness that produces a brutalizing, beggar-thy-neighbor society. Victorian Moralist John Ruskin denounced “the deliberate blasphemy of Adam Smith: Thou shalt hate the Lord thy God, damn His laws, and covet thy neighbour’s goods.”

But capitalism has the overwhelmingly powerful defense of simple realism. There is just enough of a “Scotchman” in most people to make them work harder for their own advancement than for the good of their fellows—a fact that regularly embarrasses socialist regimes. The Soviet Union permits collective farmers to cultivate small private plots in their spare time and sell the produce for their own profit. Those plots account for a mere 4% of the land under cultivation in the U.S.S.R.—yet, by value, they produce a fourth of the country’s food.

Profits and other incentives are indispensable to any economic progress. A product or service that is sold for exactly the cost of producing it yields no margin to raise wages, buy new machinery or pursue research leading to new products. Only profits can finance that—whether in a capitalist or a socialist society.

The argument between capitalism and authoritarian economic systems comes down to two questions: Which system can make the most efficient use of manpower, materials and money to create the greatest opportunities for free choice, personal development and material well-being for the greatest number of people? And which system is more just and satisfying in human terms?

An authoritarian economy appeals to many human instincts. It offers stability and security at the expense of freedom and a greater degree of economic (though not political) equality than capitalism. It can provide full employment by creating a surfeit of make-work, low-productivity (and thus lowpaying) jobs. It keeps prices stable by fixing them, almost invariably at high levels in terms of real income. Yet even the meanness of living standards in such a system may have a certain attraction for millions of people outside those countries who are repelled or surfeited by commercial values. Distrust of money lies deep in the West’s history, from St. Francis of Assisi and the Anabaptists to the modern romantics. Authoritarian economies are as materialistic as capitalism, if not more so, but they are often perceived differently. And the ability of the command economy to centralize power has an irresistible appeal for otherwise shaky leaders of developing nations. As Moynihan observes, many of the developing nations have an “interest in deprecating the economic achievements of capitalism, since none of their own managed economies are doing well.”

On the historical record, capitalism clearly is more enriching—in every major way. Capitalism, says Eckstein, “is the only engine that has been developed so far that encourages people to be highly innovative, to develop new products and processes.” Profit-seeking capitalists have developed all the vital machines of “postindustrial” society. In contrast, centrally managed economies have rarely done well at developing civilian high-technology industry—largely because inventors lack incentive. In socialist economies the same lack has led to appalling shoddiness in many of the services that provide life’s amenities.

Capitalists also have produced a far greater quantity and variety of consumer goods and services than socialist central planners. The reason: for all its weaknesses, the market functions as a superbly adaptive super-computer that continuously monitors consumer tastes. Says Walter Heller: “The private market makes trillions of decisions without any central regulation. It is a fantastic cybernetic device that processes huge amounts of information in the form of the consumer voting with his dollars, the retailer telegraphing back to the wholesaler, the wholesaler to the producer.”

Communist nations have paid the market the ultimate compliment by trying to introduce elements of market pricing into their own economies, so far with meager success. The trademarks of Communist economies remain indelible: low productivity, shortages of goods, lengthy queues in stores, years-long waits for apartments. In order to spur initiative, most Communist countries also have huge and growing differences in real income (and perquisites) between commissar and collective farmer. Nikita Khrushchev once replied to a charge that the Soviet Union was going capitalist: “Call it what you will, incentives are the only way to make people work harder.”

More important, capitalism’s superior productivity is not solely a matter of electric toothbrushes and throwaway soft-drink bottles: the system also does better at filling basic human needs like food. Farmers in the capitalist U.S., Canada and Australia grow enough not only to feed their own peoples but also to export huge surpluses. In contrast, the Soviet Union—although 30% of its workers labor on its vast farmlands—has to import food. So does India, which permits private farming but insists out of socialist principle that the produce be sold at unrealistically low prices.

The freedom of capitalist society at its best must be prized above all. True, some dictatorships are capitalist because most of the economy is privately owned. Still, the major capitalist nations all have popularly elected governments that guard the right of free speech and assembly. Capitalism demands, by definition, that the individual be free within broad limits to spend and invest his money any way he pleases, to own private property and to enter any business or profession that attracts him. The state that grants those significant freedoms demonstrates a reluctance to interfere in the citizen’s daily life.

In sharp contrast, the managed economies exist mostly in one-party states or under completely totalitarian regimes. Any government that tries to dictate almost every decision on production, prices and wages assumes an arbitrary power that would be impossible to reconcile with political freedom. In most managed economies, for example, a strike by workers is a crime against the state; it can hardly be prohibited without suppressing the right to advocate such a strike.

In sum, there is no alternative to capitalism that credibly promises both wealth and liberty. Despite its transitory woes and weaknesses, capitalism in the foreseeable future will not only survive but also stands to prosper and spread. Perhaps the most balanced judgment of Adam Smith’s wondrous system is Winston Churchill’s famous conclusion about democracy: It is the worst system—except for all those other systems that have been tried and failed.